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In part, this paper has been inspired by the call for more critical research into IC in the 2006 .... The closest to any single unifying model of what IC measurement.
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Intellectual capital measurement: a critical approach

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Faculty of Economics and Business, The University of Sydney, Sydney, Australia

John C. Dumay

Abstract Purpose – The purpose of this paper is to investigate intellectual capital (IC) measurement critically so that the dynamics of intangible value creation can be better understood and to provide insights into how IC is constructed rather than what IC is. Design/methodology/approach – This paper presents a case study on how a division of a large Australian financial institution utilised an approach based on complexity theory to investigate IC in practice. The method utilises narrative, numbers and visualisations to make sense of IC at a particular point in time. Findings – It is argued that trying to “fit” existing popular frameworks to gather IC measurements inside organisations has little relevance to understanding the value-creation process. As a result of the investigation of IC in this paper, it is found that, to date, IC measurement has relied heavily on “accountingisation” and that alternate methods to understand IC need to be developed. The paper highlights that academics and practitioners need to develop new skills. Research limitations/implications – The case study is limited to the use of an alternate method to investigate IC in a particular organisational and cultural setting. The research opens the possibility of the benefits of changing thinking about both research into, and the practice of, measuring IC. Practical implications – Rather than being constrained by the traditional models of measuring intangibles, by way of contemporary IC reporting frameworks, a more open process is outlined that could improve the timeliness and use value of the information. Originality/value – This paper has relevance to both IC academics and practitioners as it critically examines the contemporary IC frameworks and offers an alternate method for examining IC which has the potential to add to a discourse which focuses on additional understanding of IC. Keywords Intellectual capital, Narratives, Complexity theory, Intangible assets, Australia Paper type Case study

Journal of Intellectual Capital Vol. 10 No. 2, 2009 pp. 190-210 q Emerald Group Publishing Limited 1469-1930 DOI 10.1108/14691930910952614

1. Introduction The concept of intellectual capital (IC) is based on the wide recognition that organisational knowledge needs to be managed (Mouritsen and Larsen, 2005) and that technology has allowed for greater dissemination of this knowledge (Meritum Project, 2002; Unerman et al., 2007). Prior research suggests that the development of IC resources creates value for organisations, especially since the majority of an organisation’s assets are intangibles that cannot represented on the balance sheet (Stewart, 1997). The identification and measurement of an organisation’s IC is important because these provide insights into the impact that the measurement of IC may have on management action. This paper investigates IC from a measurement perspective by presenting a critical case study. In part, this paper has been inspired by the call for more critical research into IC in the 2006 special edition of the Journal of Intellectual Capital (Vol. 7 No. 1). More specifically, it answers the call for deeper “thinking and real research on the

dynamics of intangible value creation,” an “acceptance of complexity and not knowing” and “more ‘how’ questions?” (O’Donnell et al., 2006, p. 10). Thus, this study attempts to understand how IC can be represented by considering the role of organisational actors and by questioning the suitability of the tenets of contemporary IC measurement frameworks. To do so, this case study utilises research inspired by complexity theory (Snowden and Boone, 2007, p. 71) to present numerical, statistical, narrative and visual representations of IC. The aim is to make sense of how IC is constructed at a particular point in time and to provide insights into how IC can be examined, how IC can be understood and how management interventions into the development of IC to engender value creation can be informed. Complexity theory has been chosen in an attempt to understand the complex and fluid nature of IC (Cuganesan, 2005) and how it related to value creation in the case study organisation. The case study organisation has been chosen because of its ongoing attempts to understand how it created value at a time where its outputs were seen as costs. The examination of how IC is constructed at the case study organisation suggests that measuring IC does impact organisations and that by taking a critical approach to examining IC; that insights, critique and transformative redefinitions (change in praxis) of IC are possible. This in turn suggests that the traditional frameworks used to manage, measure and report IC need to be transformed and that the one size fits all approach to IC taken to date is unsatisfactory. To address IC measurement critically, this paper is presented in a further four sections. In Section 2, a discussion of the evolution of IC measurement is presented and a critique of its current status is proffered. Section 3 presents empirical evidence from a case study, influenced by complexity theory, to exemplify a novel approach to measuring IC. Section 4 discusses the findings of the paper and Section 5 presents the conclusion. 2. Intellectual capital measurement There can be little argument that the world’s economy has shifted, and is continuing to shift, from an economy driven by the use of tangible assets such as plant, equipment and real-estate to an economy driven by the use of intangible resources such as knowledge, technology, core competencies and innovation (Meritum Project, 2002). An example of this shift is that National Association of Securities Dealers Automated Quotations listed companies, such as Microsoft, Cisco, Amazon, and Yahoo, who are representative of the knowledge-based economy, have become permanent members of the Standard & Poor’s (S&P) 500 index. Towards the end of 2002, knowledge-based economy companies represented 11.9 percent of the S&P’s market value (Burgman and Roos, 2004). While the definition of the knowledge-based economy is ambiguous, several structural changes have been identified (Meritum Project, 2002) as central to the concept: . Knowledge is being recognised as a commodity and is being utilised in transactions. . The connectivity between knowledge agents has increased remarkably. . Information and communications technology (ICT) has allowed for greater creation and diffusion of knowledge and thus the network of knowledge agents has expanded globally.

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The increasing relevance of intangible assets can be seen in the valuation of companies over the last few decades, where the ratio of the market value to balance sheet or book value of a company has been constantly growing, especially since the 1990s. The difference in the market-to-book ratios shows that the current financial accounting systems in practice are not adequate definers of economic value or resources. The Meritum Project (2002) theorised that this may result in the inefficient allocation of resources, both human and financial. Stewart (1997) espouses the view that this difference between the tangible accounting assets base of a firm and the market value of a firm is considered to be “IC” from which value emanates. While the market to book ratio is a simplistic way of conceptualising IC, Brennan and Connell (2000) identify that it has three weaknesses. First, IC does not comprise the entire difference between market and book values. Second, the continual fluctuation of share prices distorts the value of IC. Last, it is a singular measure of the value of IC that does not give a breakdown of the individual components of IC. Thus, the value of utilising such a simplistic framework to view IC is questionable. In addition, a plethora of frameworks for the measurement of IC have been developed. Sveiby (2007) identifies 34 different frameworks for the measurement and reporting of IC, the majority of which attempt to identify the components of IC. One problem with the plethora of views about measuring the components of IC is that no one view, other than the concept of intangibility, has consensus among practitioners and researchers. The closest to any single unifying model of what IC measurement should encompass seems to be founded in the general acceptance of the tri-partite representation of IC categories as human, structural and relational capital. Even here the terminology can differ (Petty and Guthrie, 2000, p. 159), other categories may be added to the model (Habersam and Piber, 2003, p. 767), or the whole model can be completely redefined (Leliaert et al., 2003). Thus, the lack of agreement among academics and practitioners into the “correct” way to represent the components of IC also brings into question the utility of these contemporary frameworks. Accordingly, research into developing other types of IC measurement frameworks based on the existing models but attempting to fit further IC components into familiar accounting and management reporting frameworks (Edvinsson and Malone, 1997; Sveiby, 1997; Mouritsen et al., 2003, p. 5; Society for Knowledge Economics, 2005) may be a fruitless task. This is because, as Andriessen (2004, p. 231) points out, contemporary IC measurement frameworks have, for the most part, been developed by practitioners rather than academics, and as a result the validity and motives behind their development is questioned as well. The development of IC measurement frameworks based on the self-interest of their developers appears to add to the confusion about what is the right framework to apply, what is likely to be the effect of measuring and disclosing IC or even if this is a worthwhile endeavour (van der Meer-Kooistra and Zijlstra, 2001). Therefore, it seems that any attempt to once again redefine what IC is would add little, if anything, to the knowledge and practice of IC measurement. This is not to say that the measurement of IC is inherently flawed or that it creates more confusion than it is worth. The message that all the models, frameworks, discussions and literature appear to be conveying is that IC is interesting (Chatzkel, 2004, p. 337); IC is complex and complicated (Cuganesan, 2005; Bueno et al., 2006); IC needs to be understood better (Mouritsen, 2006); and IC needs to have a diverse set of

tools for its management and measurement dependent on the purpose of the measurements (Sveiby, 2007). But more importantly, the literature shows that for the last two decades the concept of IC has become a consideration for all organisations and that organisations need to be able to assess how IC works within their operational context. So, the aim of this paper is not to answer the all encompassing question of “What are the organisation’s measures of IC?” but rather to answer “How is IC constructed within the organisation?” This questioning is akin to taking a “critical” approach to contemporary thinking on IC measurement. But what is meant by being “critical” and what does taking a “critical” approach have to do with IC? The notion of a “critical approach” has developed in response to similar conditions to those under which the concept of IC has developed. Alvesson and Deetz (2000, p. 14) consider that a “critical” approach to management research was developed as a response to changing social conditions as the result of developments in “science, industrialization and communication/ information technologies.” Similarly, the concept of IC has come into prominence due to structural changes in the economy as knowledge, communication and the importance of intangibles have changed the conditions under which organisations now operate (Meritum Project, 2002). These changing conditions in society and in organisations have usually been lauded for their positive impacts, especially in western societies, but the domination of these changes can also have negative impacts (Alvesson and Deetz, 2000) and this has also been recognised in the IC literature (Caddy, 2000; Leitner and O’Donnell, 2007). In this paper, the term “critical” is not used to find fault with current thinking about IC measurement, but to question its current tenets, thus the focus is on critique[1] rather than criticism[2] (Alvesson and Deetz, 2000, p. 8). Questioning the tenets of contemporary IC measurement comes from the recognition that the achievements of two decades of management practice and academic research surrounding IC has mainly concentrated on establishing these tenets, that is, the definitions, the measures and frameworks of IC (Chatzkel, 2004). But currently, the IC paradigm suffers from a lack of proliferation as evidenced by the relatively few organisations that measure and disclose their IC (Brennan, 2001; April et al., 2003; Bontis, 2003; Ordo´n˜ez de Pablos, 2003; Guthrie et al., 2006; Unerman et al., 2007). Thus, if the tenets of the IC paradigm were as fruitful as some of its pundits have declared the question is “Why have not more organisations taken it up?” One reason proffered for this is that the measurement, management and reporting of IC is at a crossroads because the creation of these tenets of IC have only gone to raise its awareness (Marr and Chatzkel, 2004, pp. 224-5). As Chatzkel (2004, p. 337) explains, in order to move through the crossroads academics and practitioners: [. . .] must substantially demonstrate the relevance of IC as a working discipline that is useful to organizations to use to gauge and generate significant value and to effectively navigate to achieve strategic goals. Otherwise, the notion of IC and all it stands for will be seen as merely one more set of very interesting ideas that is continuingly elusive to grasp and use.

As a result, there has been interest in the exploration of a more critical stance towards the research and understanding of IC (O’Donnell et al., 2006). By thinking “critically” about IC measurement, it is intended to help change the way it is understood and to break free from the construction of IC that the current dialogue appears not to have been able to progress. Past critical IC research has concluded that the potential of IC

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will not be realised if management continues to force thinking about IC into the existing frameworks (Chaharbaghi and Cripps, 2006) based on accounting, management control and the management of intangibles (Guthrie et al., 2003, pp. 430-1). This thinking is not only advocated for practitioners, but for academic researchers as well, so that a deeper understanding of how IC works and how IC is utilised in organisational change can be developed (Mouritsen, 2006). As O’Donnell et al. (2006, p. 7) explain this way of viewing IC research will not answer the question of “What is IC?” rather the question asked should be “How is IC?” This is because asking how is more revealing (O’Donnell et al., 2006, p. 7) as it addresses the praxis of IC as it is implemented in organisations, rather than re-creating a static representation of IC, as is represented by contemporary measurement frameworks and their associated theory or theories. In considering the how question, this paper builds upon the identification of IC as a complex phenomenon and the growing need to acknowledge and empirically investigate the complexity of IC in organisational settings (Cuganesan, 2005; Bueno et al., 2006; Mouritsen, 2006; O’Donnell et al., 2006, p. 10). From the perspective of complexity, there is a growing literature that explores complexity from an organisation theory perspective (Anderson, 1999; Anderson et al., 1999; Lewin, 1999) and in particular, it focuses on exploring the links between complexity and organisational strategy (Lewin, 1999; Kurtz and Snowden, 2003). Complexity theory deals with understanding systems where there is a non-linear relationship in the interactions between the elements of a system. These systems are characterised by the fact that small changes to one or two parameters may have significant, emerging and unexpected effect(s) on the entire system (Anderson, 1999; Browning and Boude`s, 2005; Snowden and Boone, 2007). Thus, if organisations are viewed as complex systems, the application of complexity theory based methods when researching IC, allows an opportunity to develop insights into IC which may not be gleaned by utilising contemporary IC measurement and research frameworks. This may then help make sense of how the complex interactions between IC resources contribute to value creation thus reducing their ambiguity, especially when examining an organisation’s intangible resources (Dierickx and Cool, 1989, pp. 1508-9). To explore the how question further, the findings of a case study into the attempt to understand IC in a division of a large Australia financial services company with over 25,000 employees is presented (herein named AusFinCo). The next section discusses the research at AusFinCo, how a critical view of IC measurement emerged and how the complexity theory and other tools were applied to develop this view. 3. Measuring IC at AusFinCo This paper is presented as a case study. The advantage of case studies is that it they can be used to explore and understand a phenomena in a particular context, they have flexibility as to the boundaries that the study can be directed, and different methods of collecting data can be used, including but not limited to, interviews, focus groups, internal documentation, external documentation, participant observations and direct observations (Creswell, 1998; Collis and Hussey, 2003; Yin, 2003). The use of multiple methods of data collection offers researchers a rich source of data from real settings (Yin, 2003) and in the case of AusFinCo allowed for the use of different data sources to suit the emergent pattern of research employed.

What is important to consider here is that the process utilised to research IC measurement was an emergent one. So, unlike a traditional format, where method and data analysis are separated, the development of the method and the data as it emerged in the research is presented together. Therefore, this section is separated into the following three sub-sections. First Sub-section 3.1 describes the research site and project. Second Sub-section 3.2 describes the first stage of the research based on an audit of the then current performance management reporting systems. As a result of the audit, a “critical” approach to understanding IC measurement was developed and this is the topic of Sub-section 3.3. 3.1 The research site and project The business operations (BOP) division of AusFinCo performs the back office functions for AusFinCo’s products; they manage the overall information technology (IT) architecture, support and enhance software systems, and manage and implement major projects. They make available infrastructure support for cash management, fraud, physical security, business services and records management. In addition, BOP manages AusFinCo’s property portfolio and outsourcing contracts. BOP employs 16 percent of AusFinCo’s staff representing about 4,000 employees and is responsible for 45 percent of AusFinCo’s expense base. AusFinCo’s, or more precisely BOP’s, motivation for commencing this research project was to demonstrate the value that BOP created for both its partner business divisions, who are the recipients of BOP services, and end-users of AusFinCo’s products and services. The problem perceived by BOP management was that the value that BOP creates for its partner business divisions and end customers is intangible. This problem was seen to be compounded by AusFinCo’s internal accounting systems which allocate the cost of the services provided by BOP to the end-users of these services. This has, in the view of BOP management, led to the perception that BOP is considered a cost to the other divisions and not a partner in the creation of value. Thus, BOP’s challenge was to articulate how it creates value for the other divisions and to understand the interaction of the intangible resources utilised in creating this value. Value here can be defined in two ways. First, it can be defined in economic terms from the view point of helping to generate income and reduce costs. Second, value can also be defined from the position of the worth or importance of the services provided by BOP from the view point of individuals who are the constituents of the groups that make up BOP, the other AusFinCo divisions and customers. To understand how AusFinCo and BOP articulated value creation, the research was conducted in two parts. The first part consisted of content analysis of relevant strategic and reporting documentation. This research was completed in October/November 2005. The use of content analysis as a method for collecting empirical data about an organisation’s IC is well established as it allows for the identification of the types of IC and the measures of IC utilised by an organisation (Guthrie et al., 2004). The objective of this research was not only to identify the key types and measures of IC in AusFinCo’s documentation, but also to establish any link between these and the challenges that AusFinCo’s management identified towards the value-creation objectives espoused in the same documents. The second part of the research took a different path by collecting organisational narratives about IC from BOP employees in March/April 2006. The particular method

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employed here is known as “pre-hypothesis research” (Snowden, 2006) and was designed to elicit narratives about IC and value creation as it was constructed at that particular time. Traditionally, the use of narrative in IC has been seen to offer reasoning behind an organisation’s management and subsequent disclosure of IC (Mouritsen et al., 2002, p. 14). But, the espoused use of narrative solely as an explanation of the reasons behind an organisation’s management of IC it is seen as too narrow. This is because narrative has been identified as not only allowing for organisations to explain their actions, but it can also be used to “reveal the individual, human projects within organizations and [. . .] construct and identify emerging organizational strategies” (Llewellyn, 1999, p. 233). Additionally, narrative can be used to represent communicative interactions that create social reality offering greater involvement of organisational actors (Weick and Browning, 1986). This expanded view of the usefulness of narrative led to its use in this part of the research as a data source rather than as an output of research. In addition to utilising the “pre-hypothesis” method, and in keeping with the emergent theme within complexity theory (Snowden and Boone, 2007, p. 71), other methods of analysis were developed to represent and thus articulate how the dynamics of IC and value creation were constructed at BOP. 3.2 Identifying IC and value creation themes For BOP to show that it adds value to the organisation, it has to communicate information about its performance. Here, in the first stage of the research, the alignment of BOP’s performance measurement systems with strategic management objectives was examined through a content analysis of internal and external BOP performance measurement and reporting documents. In this analysis, the following documents, as presented in Table I, were used. From the examination of these documents it was determined that AusFinCo is following what can be described as a customer service-oriented strategy (Rucci et al., 1998). The examination of the 2005 BOP Strategic Plan provided the strategic objectives articulated below, the first and third of which related to the overall AusFinCo strategy statements. The major BOP strategic objectives were identified as: (1) enhance the customer experience to be number one in customer service; (2) significantly improve our operational efficiency at a unit cost level to achieve a significantly lower expense profile; (3) build an achievement-based culture focused on customer service and innovation; and (4) optimise capital usage by reducing our operating risk and leverage profiles.

Table I. List of internal and external documents examined

Internal documents

External documents

2004 BOP Strategic Plan 2005 BOP Strategic Plan May 2005 BOP Performance Report July 2005 BOP Performance Report

2004 2005 2004 2005

Annual Report Annual Report Social Impact Report Social Impact Report

In order to assess whether key performance indicators (KPI’s) contained in the July 2005 BOP Performance Report reflected the extent to which they measured the strategic objectives of BOP, an analysis of the KPIs was conducted. In addition, the measures were categorised in terms of whether they reflected attributes of tangible resources, being either physical or financial capital; or intangible resources, being either relational, structural or human capital. The results of the measurement audit are contained in Table II. The resultant analysis of this examination of KPIs highlighted the following four issues. First, while the strategic objectives of BOP highlighted the role of IC (in terms of enhancing customer experiences, culture and innovation), management were concerned that existing KPIs contained in quarterly BOP performance reports were insufficient in measuring and reporting the attainment of strategic objectives. Second, in keeping with BOP being a cost centre, almost half of the measures reported focused on operational efficiency. Examples of these included departmental expense reporting, outsourced expenses, IT costs per full-time equivalent employee (FTE) and number of FTEs. Third, there were limited human capital measures or those that related to the building of an achievement-based culture. Fourth, no attempts had been made by BOP management to develop strategic links between measures. Overall, while there were measures relating to relational, structural and human capital, their strategic importance and how they demonstrate how BOP creates value was often unclear. More importantly, from a critical IC perspective, it brings into question the ability of the current performance measurement framework to represent BOP’s IC. Thus, if the current framework cannot deliver such an outcome then the ability of BOP to understand how IC works and how it is utilised in organisational change is also questioned. But as identified earlier, the traditional approaches and frameworks to measure IC have also been questioned and it was also the opinion of BOP management that it did not see the value in creating an additional “IC report.” Thus, it presented an opportunity to take an alternative approach to understanding IC within the BOP context and this is outlined next. 3.3 Understanding IC In the second phase of the research, a critical research method referred to as “pre-hypothesis” research was utilised (Snowden, 2006). This method utilises complexity theory by way of the Cynefin (see www.cognitive-edge.com for further details) framework (Kurtz and Snowden, 2003; Snowden, 2006; Snowden and Boone, 2007) which was linked to IBM’s “Knowledge and Differentiation Programme” in Europe in 1997. This framework makes use of both qualitative and quantitative data to provide context and explanation about IC (and other phenomena) within a particular organisational setting. This method was also chosen as AusFinCo had already been using complexity theory in the initial and ongoing development of a strategic innovation capability within the organisation with the purpose of increasing “the resilience of the organisation in the face of changing environmental characteristics” (Kay, 2007, p. 1). At the heart the “pre-hypothesis” method is what Snowden (2006) refers to as a sense-making item (SMI). An SMI is defined as “anything that helps people make sense of the world they live in” (Snowden, 2006, p. 1). The most common SMI form is that of an anecdote or short fragments of fully formed stories that are seen as part of human

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Table II. Content analysis – measurement results

Customer experience goals met Channel availability and response service levels Operational excellence KVDs Projects with green status

Resignation rate

Structural capital

Human capital

Note: aSome measures have been classified into more than one category

Quarterly staff commitment BOP compliance training – percentage attended

IT expenses, IT as percentage of Projects with green status revenue, IT cost/FTE Operational excellence key value drivers (KVDs) Projects with green status

Customer satisfaction – various

Relational capital

One-day absences/FTE FTE and personnel expenses analysis Average annual leave outstanding days

Gross expenses Monthly expenses BOP projects financial performance Profit performance Underlying profit BOP area contribution after tax Balance sheet information Project financials Outsource expenses Community days/FTE

Financial/physical Customer satisfaction – capital various ATM cash availability (%)

BOP objectivesa Build an achievement-based Improve operational efficiency culture

Risk rating BOP non-lending losses; complaints Risk rating WIRES incidents and audit results risk rating Compliance breach/incidents indicators Projects with green status

Optimise capital usage (risk/leverage)

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Resources

Enhance the customer experience

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discourse and are at the heart of how people transfer knowledge to each other (Czarniawska, 1998). The use of SMIs is enabled by prompting respondents to give narrative responses to non-directive questions. The theory is that when a person is asked a non-directive question that is answered with a narrative from either their point of view or a third-party perspective, they will more likely give answers based on their experiences. Allowing these narratives to be told from a third-party perspective also allows for more open answers, especially when the narrative could be embarrassing or negative from the respondent’s perspective. In the case of BOP, 208 narratives were gathered from 41 employees who were selected using a random-sampling process. Each of the employees was asked to provide five narratives based on open questions about their experiences of work life at BOP. Each of these narratives were indexed (scored) using a set of filters based on themes that were developed to elicit understanding about elements of IC that were identified by BOP management as being relevant to improving organisational performance. The indexing was based on a 0-10 scale and was only scored if the respondent felt that the particular index applied to the narrative in question. Table III identifies the filters used to self-analyse the narratives and the frequency of narratives scored by each of the filters. Examining Table III provides both a confirmation and more detail on the IC components that are relevant to the conduct of business activities that impact IC, as envisaged by BOP employees. In examining relational and structural capital, there is a strong emphasis on knowledge, communication, the use of technology and the right mix of human intervention and automation. The role of technology in creating value was confirmed with three of the top five structural capital indexes being about the impact on processes and customers. Importantly, the role of human intervention should not be overlooked with communication and people helping customers being seen as strong themes of work at BOP and AusFinCo. Finally, examining human capital components in Table III indicates the importance of attracting, engaging and retaining employees. Also confirmed was the importance of knowledge workers, with employees emphasising the need to learn through training and from knowledge sharing with other staff. Given the complexities of IC, it was necessary to consider how each of the IC components influenced each other and the overall pattern of interaction. Thus, in addition to investigating the perceived importance of each IC component, the interaction between them was also analysed. This is where the research departed from the “pre-hypothesis method” as outlined above, yet still remained coherent with the emergent theme from within complexity theory as it attempted to further make sense of IC within the BOP context. This innovation emerged from the author’s desire to achieve two ends. First was to explore the complex web of inter-relationships between the IC components. Second was to make sense of how these complex interactions could reduce the ambiguity between the organisation’s IC resources and value creation. The following describes the author’s analytical innovation by way of the development of visual maps which display the interaction pattern of IC at BOP. These are shown in Tables IV and V. The basis of these maps is a pair wise correlation analysis of the ranking scores provided by the employees for each of the IC components. According to probability theory and statistics, pair-wise correlation, also called correlation coefficients, indicates

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Table III. Ranking of IC components

IC component Relational capital Creates value for AusFinCo Beating the competition Creates value for customer Requires a knowledge worker Positive customer experience Technology helping customers Requires a process worker Sharing knowledge externally I can see the customer Structural capital Effective lines of communication Technology supports processes People helping customers Easy to use technology Technology supports customers Performance is product-based Innovative products Product focused Human capital An attractive place to work Trained and competent staff Learning from others The work is engaging Long term career Set in their ways The new generation Looking to retire

Frequency of self-indexing 187 148 146 145 140 117 109 98 94 159 135 131 126 117 107 99 87 172 159 146 145 134 108 92 75

the strength and direction of a linear relationship between two random variables (Kenkel, 1989, pp. 649-58). The identification of strong relationships between IC elements should be taken as a method for establishing retrospective coherence about what has happened in the past rather than as a basis for future predictions, although they can be used to influence future interventions (Snowden and Boone, 2007, p. 71). These relationships are represented in the figures at the intersection of the elements and are shaded to represent the strength of the potential interaction between them. Black denotes very strong interactions; grey denotes a strong interaction and white denotes little or no interaction. While Table IV shows the overall pattern of relationships, the desire of the research was to reduce the ambiguity between resources and value creation. Thus, in order to achieve this end and to simplify the analysis, the relational capital components considered to most identify with customer and shareholder value were selected as the “value dimensions,” and again the relationships between the IC components and these dimensions have been shown in Table V This analysis thus provides insights into reducing the ambiguity as to how IC works within BOP and the complexities of the IC-value creation nexus. From this perspective, three points were identified that reduced this ambiguity. First, there are strong inter-relationships between the four value dimensions,

IC elements

Relational capital

Structural capital

Human capital

Positive customer experience Creates value for the AusFinCo I can see the customer Sharing knowledge externally Requires a knowledge worker Beating the competition Creates value for customer Requires a process worker Technology helping customers Product focussed Innovative products Performance is product based Easy to use technology People helping customers Effective lines of communication Technology supports customers Technology supports processes The work is engaging Trained and competent staff Learning from others Long term career Set in their ways An attractive place to work The new generation Looking to retire

Filters

Learning from others

Effective lines of communication

People helping customers

Easy to use technology

Performance is product based

Creates value for customer

Beating the competition

Requires a knowledge worker

Sharing knowledge externally

I can see the customer

Human capital

Long term career

Structural capital

Set in their ways

Relational capital An attractive place to work

IC elements

Looking to retire

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Table IV. Map of inter-relationships of IC

The new generation

Trained and competent staff

The work is engaging

Technology supports processes

Technology supports customers

Innovative products

Product focused

Technology helping customers

Requires a process worker

Creates value for the AusFinCo

Positive customer experience

Creates value for customer

Beating the competition

IC components

Creates value for AusFinCo

Value dimension Positive customer experience

IC elements

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Positive customer experience Creates value for AusFinCo Relational capital

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I can see the customer Sharing knowledge externally Requires a knowledge worker Beating the competition Creates value for customer Requires a process worker

Structural capital

Technology helping customers Product focused Innovative products Performance is product based Easy to use technology People helping customers Effective lines of communication Technology supports customers

Table V. Value dimensions and interactions between IC components

Human capital

Technology supports processes The work is engaging Trained and competent staff Learning from others Long term career Set in their ways An attractive place to work The new generation Looking to retire

indicating “value bundling” across customer and shareholder value dimensions. Employees perceive that delivering customer value will in turn translate into value creation for AusFinCo in a competitive context and for its shareholders. Second, the importance of managing knowledge flows and knowledge workers is emphasised, with strong relationships not only between the requirement for knowledge workers and people helping customers and the four value dimensions as has been noted earlier, but also for the need to share knowledge externally and innovation in terms of products, both of which have strong and very strong relationships with the four value dimensions. Last, it confirms in more comprehensive fashion the role of technology. While technology helping customers was not within the top five indices relevant to work life at AusFinCo as indicated in Table III, it is an important enabler of customer and shareholder value, having very strong relationships with all four value dimensions.

Overall, a relationship between elements of human, structural capital, and improvements in relational capital at AusFinCo is indicated from the perspective of BOP employees. The analysis indicates that people in BOP believe there is a relationship between a work environment that is seen to be attractive and engaging, develops competencies and offers employees a career that is both enabled by and allows the application of ICT and the flow of knowledge. It is the view of BOP employees that the interaction of these intangible resources creates value for AusFinCo and its customers. Thus, from a value creation perspective, managerial interventions into the organisation that, for example, develops the work environment, develops career paths and ICT resources are seen to be beneficial and focused. This is seen to offer a potential advantage over contemporary IC frameworks which are capable of identifying the important components of IC but are still plagued by continued ambiguity over the combination of intangible resources that create value. Thus, it is demonstrated above that it is possible to take a snapshot of an organisation at a desired point in time and report, by way of organisational narratives, a visual display, supported by the analysis of IC interactions, of how an organisation’s IC is constructed. While this has the potential to disseminate information about the state of the interactions between the elements of the organisation’s IC, what can add further value to the organisation is that it is also possible to take another snap shot of the organisation after informed interventions take place to see if the pattern of interaction of IC elements changes. The benefit of taking a snapshot beforehand allows for the development and implementation of organisational interventions or probes that have the potential to influence the development of patterns of interactions that are desirable for the organisation. The subsequent post-intervention snapshot analysis will help the organisation understand what interventions were successful and those that were not. Additionally, should the results of a specific intervention become reliably predictable it may be possible to move the intervention from the complex to the known domain (Kurtz and Snowden, 2003; Snowden and Boone, 2007). 4. Discussion from a “critical” stance The purpose of this section is to use the “critical” approach to management research and link it to the empirical evidence. According to Alvesson and Deetz (2000, pp. 17-20) there are three tasks to be undertaken in a “critical” approach to research. These are “insight,” “critique” and “transformative redefinitions.” Thus, this paper’s contribution to the literature on IC measurement is offered from these perspectives. Each of these elements of the critical framework will now be presented in the following sub-sections. 4.1 Insight According to Alvesson and Deetz (2000, p. 17), the task of insight is to demonstrate “our commitment to the hermeneutic, interpretive and ethnographic goals of local understandings closely connected to and appreciative of the lives of real people in real situations.” So, insight from a critical IC measurement perspective deals with trying to understand the impact of IC practices on both the people and the organisations they belong to. Thus, when viewing IC in this way the answer to O’Donnell et al.’s (2006, p. 7) question of “How is IC?” can be addressed.

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The current research addresses such a question as it provides an example of how the traditional frameworks of IC can be utilised to develop a view from within an organisation rather than trying to “fit” an existing framework to gather measurements that may have no relevance to the value-creation process. Thus, the insight that was developed to understand IC and value creation at BOP was achieved using a critical research method, being Snowden’s “pre-hypothesis” method in conjunction with the author’s development of a visual representation of IC interactions. The application of these methods to examine IC measurement questions not only the contemporary IC measurement frameworks but also the manner in which this could be accomplished. This is evidenced by the ability of the analysis to reduce some of the ambiguity surrounding the combination of intangible resources that create value as shown in Table V. As Alvesson and Deetz (2000, pp. 148-9) explain, the development of critical insight is all about the art of interpretation so that in the end new meanings and unexpected light is shed on the subject. In this case, the visual representation of IC and value dimensions develops this new meaning and provides for greater understanding of IC within the BOP context. 4.2 Critique The objective of critique “is to counteract the dominance of taken-for-granted goals, ideas, ideologies and discourses which put their imprints on management and organization phenomena” (Alvesson and Deetz, 2000, p. 18). By “critiquing” the applicability of contemporary IC measurement frameworks it opens the possibility of examining IC differently. This is important because, as was earlier argued, one of the problems of the current view of IC measurement is that many of the ideas and terminology of IC that have been developed are the result of past management thinking and that as a “new” concept IC is heavily influenced by “old” ideals. The most prominent of these relates to the term “IC” in that the terminology itself is the source of misunderstandings of its very nature. The word “capital” implies that knowledge is some form of material wealth that can be managed in the same way as physical assets and that investing in these assets leads to the creation and possession of knowledge resulting in more wealth, both of which are empirically unproven (Newman as quoted in Chaharbaghi and Cripps, 2006, p. 42). One only has to look at the proliferation of the original frameworks which attempted to ascribe a dollar value to IC or the balance sheets of IC in the format of “scorecards” as ample evidence of this thinking (Sveiby, 2007; Ricceri and Guthrie, 2009). The subsequent unwillingness of the practitioner and academic communities to universally adopt any of these frameworks coupled with the fact that many of the new frameworks do not offer a radically different view of valuing or measuring IC continues to bind the IC paradigm to old accounting and performance management ideals. Additionally, the continued dominance of old managerial ideals has led to the misuse of the IC measurement frameworks. Sveiby (2007) outlines examples of IC measurement as being used as either a management control tool or for enhancing an organisation’s public relations and how this has had negative consequences for organisations. The investigation of IC measurement in this paper offers critique in that it exemplifies the ability to break free from the current frameworks of IC measurement that have been identified as being constructed by management practitioners and

academics with the “accounting” of intangibles in mind. The view offered in this paper is that these contemporary IC measurement frameworks are reifying IC in the same manner in which tangible assets are portrayed within accounting, which is akin to attempting to make the intangible tangible. This is what the author defines as an “accountingisation” of IC. This practice of the “accountingisation” of IC has at best brought attention to the concept of IC and not its praxis, thus the ability of contemporary IC frameworks to generate “understanding” is questioned. The converse to contemporary IC measurement is demonstrated in this case by the production of the correlations between IC elements and the resulting patterns, which by their very nature remain intangible. These measurements of IC interactions are remarkably different from the contemporary IC measures found in BOP’s performance management reports. 4.3 Transformative redefinition The last task of critical research “is the development of critical, managerially relevant knowledge and practical understandings that enable change and provide skills for new ways of operating” (Alvesson and Deetz, 2000, p. 19). This last task is especially important to measuring an organisation’s IC as there are inherent contradictions between the espoused benefits of IC and the reality of organisational practices. For example, as Mouritsen (2006, pp. 835-6) points out, organisations are more likely to invest in human capital when they are “in the black” and to reduce the number of employees when they are “in the red.” This contradicts the espoused benefits of human capital which, by the logic and argument of the IC paradigm, advocate the need to invest in employees as investments in human capital, and other forms of IC, are required for the long-term financial success of the organisation. These and other contradictions will continue to evolve from the ongoing research into IC but should be taken as opportunities to develop insights that encourage more progressive management practices (Alvesson and Deetz, 2000, p. 20). Previous thinking about IC that has forced the analysis, understanding and management practice of IC into entrenched management and accounting paradigms has resulted in a co-optation of IC into management practice. This can in part be to blame for the lack of take up of IC identified earlier and as evidenced by a number of organisations that have adopted IC management practices, lauded the benefits and then quietly withdrawn, especially when the going gets tough or they lose interest in the concept. Thus, IC is not a concept that translates automatically into beneficial organisational outcomes. The changes and benefits that accrue from managing IC are more likely to be developed “in an ongoing struggle including much practice and frequent false starts” (Alvesson and Deetz, 2000, p. 20). In order to progress the critical agenda on IC, managers will need to learn new skills (Alvesson and Deetz, 2000, p. 20) that will enable them to better understand the evolving insights and critiques of IC. By utilising these new skills and understandings, better decisions about how IC can be utilised in a particular organisational setting can be made rather than attempting to “fit” a particular organisation’s IC into one of the contemporary IC measurement frameworks (Mouritsen, 2006, pp. 829-32). This paper offers an example of such skills. The ability to apply alternative modes of investigating IC by utilising complexity, narrative, numerical, statistical and visual techniques outlines the types of skills that practitioners and researchers may need to acquire and

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develop in order to break free from the constraints of the current domination of contemporary accounting based frameworks of IC measurement. One objective of the “critical” approach is not to direct what needs to be done, but rather to build upon critique to offer “a more positive future or more cautiously, alternative routes towards engagement with the world” (Alvesson and Deetz, 2000, p. 152). In this light, it is emphasised that retaining the “accountingisation” of IC measurement will only stifle the future of IC; utilising other approaches is not only possible but is likely to bear fruit, such as reducing the ambiguity in relation to intangible resources and value creation. Thus, a specific set of recommendations is not made, nor is advice offered on what exactly the management of BOP should do next other than offering the opportunity to utilise a different way of measuring IC. In reality, all that has been done is to open the door to a possible productive way of understanding IC and the complexities of value creation within the specific organisational context of BOP. 5. Conclusion The insight offered in this paper is that the traditional frameworks used to manage, measure and report IC need to be transformed and the one size fits all approach to IC is unlikely to provide any more answers than it already has. This is because of the inability of contemporary measures of IC to reduce the ambiguity between the interaction of intangible resources and value creation at a specific point in time. What has been demonstrated in this paper is the ability to view both the research and application of IC measurement differently by examining how IC is constructed in an organisation so that there is the potential to reduce the ambiguity between the intangible resources of an organisation and the ability to create value. Thus, trying to “fit” contemporary frameworks to gather IC measurements to specific settings within organisations may have no relevance to understanding their value creation process. It is this paper’s argument that it is appropriate for a more critical view of IC measurement to be taken in both research and practice. As a result of the investigation of IC measurement in this paper, the ability to break free from an “accountingisation” of IC that to date only seems to have raised the awareness of IC and not the praxis of IC is explored. The measurements of IC interactions outlined here are remarkably different from the IC measures found in contemporary performance management reports and IC measurement frameworks. By learning and utilising new skills and understandings, managers can make better decisions about how IC can be utilised, this is in opposition to attempting to “fit” a specific IC context into one of the contemporary IC measurement frameworks. Thus, the ability to apply alternative modes of investigating IC by utilising other techniques shows that practitioners and researchers need to acquire and develop new skills in order to break free from the constraints of the current domination of contemporary accounting based frameworks of IC measurement. The main limitation of this case study is that the use of an alternate method to investigate IC in a particular organisational setting. So, while the process outlined suits this particular organisation, it does however open up the general understanding of the benefits of changing our thinking about both research into, and the practice of, measuring IC. Thus, rather than being constrained by the traditional models of

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